Bank of England slashes its UK growth forecast, but says the economy is still solid

The Bank of England today cut its forecasts for economic growth over the next three years but suggested interest rates are likely to remain low for the forseeable future.

It now expects GDP growth of 2.6% this year, down from 2.9% forecast in February. Growth for 2016 is revised down from 2.9% to 2.6% and from 2.7% to 2.5% in 2017.

But the Bank’s Governor Mark Carney stressed that the outlook for the economy “remains solid” despite the gloomier than expected outlook that sent the pound slumping.

It warned of the dangers of a “disorderly” end to Greek debt negotiations with the Eurozone and the potential global financial volatility that could come when America’s central bank hikes interest rates, something markets expect to happen in the Autumn.

The Bank’s Quarterly Inflation Report suggested that the first interest rise will come in the middle of next year.

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The Bank’s UK inflation forecast was little changed, with prices expected to be rising at 0.7% at the end of this year, up from 0.6% previously. It still expects a brief period of deflation this Spring.

Inflation at the end of 2016 is seen at 1.7%, down from 2.1% last time.

Meanwhile, upbeat jobless figures showed the number of people out of work dipped by 35,000 to a seven-year low of 1.83 million in the three months to March, although the quarterly fall was the smallest for almost two years.

In London, unemployment dropped by 10,000 to 285,000 or 6.2% of the workforce.

Britain’s unemployment rate of 5.5% is now the second-lowest in the European Union after Germany.

Employment continued to rise, up by 202,000 to more than 31 million, the highest since records began in 1971.

Average earnings were up 1.9% in the year to March, up by 0.2 percentage points on the previous month, and compares with inflation of zero.

Chancellor George Osborne said: “Today we see further proof the plan is working with unemployment falling, record numbers of people in work and confirmation that regular pay packets are growing at their fastest in four years, putting more in people’s pockets and stretching family budgets that bit further.”

David Kern, chief economist at the British Chambers of Commerce, said: “It would be premature for the broad positivity in the latest jobs figures to lead to an early increase in interest rates. Businesses need a continued period of stability in order to deliver the growth and prosperity we want to see.”